Downtown, Waikiki business property vacancies increasing

News Report
Samson Kaala Reiny

Even "the gathering place" is emptying out.

Oahu's business vacancies are on the rise, following suit with many cities throughout the country and abroad troubled by the current economic malaise.

The island's office vacancy rate hit 8.6 percent this past year, in contrast to a decade low of 6.5 percent in mid-2007, according to a year-end report from Colliers Monroe Friedlander, a commercial real estate brokerage firm. Throughout 2008, downtown businesses alone vacated nearly 50,000 square feet of office space. That figure is expected to rise in 2009.

"Overall, commercial real estate market arena is slowing here in Hawaii," said Mike Hamasu, the firm's director of consulting and research, "and the market dynamics don't indicate a change in the environment in the near future."

The dynamics in question are as varied as the businesses involved.

Mortgage companies and construction firms have downsized since home sales have plummeted. Financiers, fearing negative spreadsheets, are making it increasingly difficult for companies to borrow cash even for day-to-day operations. In turn, companies are eliminating office space and staff. And the retail market, moving into the new year, will also begin to soften.

According to the report, the recent Nordstrom addition at Ala Moana, the Pearlridge Uptown II expansion, and the Avenue Shops at Safeway added over half a million square feet of occupied space to the total inventory in 2008, making retail sector appear remarkably strong on paper. But recent holiday sales are a greater indicator of where the market is heading.

"Retail sales are falling off the cliff," said Daniel Jarrett, managing director of the office division at Grubb and Ellis, another commercial real estate brokerage firm.

According to Jarrett, many businesses make as much as 60 to 70 percent of their revenue during the holidays. "So with the dismal sales businesses have been reporting, we're going to start seeing a lot of empty storefronts."

"We're probably going to see a 1 to 2 percent rise in retail vacancies this year," said Hamasu.

To get an idea of what 2 percent looks like, think of the size of Kahala Mall.

Outsiders determine Hawaii's economic health

While the whole country and many parts of the world is feeling the economic strain, Hawaii is particularly vulnerable since its success is heavily dependent on outside investment and spending.

"Hawaii is a secondary market," said Hamasu. "If the economy is doing badly, mainland companies are going to begin layoffs, stop growth, and plan for difficult times. Hawaii is expendable."

As for the retail sector, tourism attendance directly correlates to its success. Waikiki illustrates the point, as 13,000 square-feet of sales space was vacated this past year alone as visitor numbers plummeted. The example continues a trend of downward growth for the tourist hotspot, which has seen a marked decrease in business since the September 11 attacks in 2001.

"Just recently, I heard that 43 percent of all visitors are from California," said Hamasu. "If they're lost about their future, especially with the way California is doing right now, they're not going to vacation here."

The islands' critical dependency on vacationers concerns Jarrett. "I've been a long-time advocate of developing other industries." he said. "We need a secondary market to offset the downturns in tourism."

An end in sight?

But for now, Hawaii must contend with the current makeup of its industry. With the state reporting a nine-year high unemployment rate of 4.9 percent last month and recent estimates stating it could increase by as much as 1.4 percent this year, a strong recovery is a must.

As far as when this will happen, Hamasu is taking an optimistic approach. "We're hopeful that this is just a protracted recession. We're looking for things to change by the middle of 2010."

And that change has several components.

"There's not just one thing that needs to happen," said Jarrett of Grubb and Ellis. "The financial markets need to stabilize. Financiers are going to want to lend. And we need to motivate people to spend and invest instead of keeping money under their bed."

But until the recovery begins, the office market is softening and starting to favor prospective tenants. "We have leverage now, said Jarrett. "We can look at multiple properties and get our clients better deals."